China: Factors that may keep iron ore futures weak

A sharp decline in raw material costs has recently led to a rebound in steel mills’ profits, even as prices of finished steel products have fallen considerably.

While metallurgical coke prices underwent eight successive rounds of declines totalling RMB 1,500/t ($235/t) in November; iron ore prices gradually approached historical lows.

Tangshan steel mills lift output after pollution control curbs rollback

Improved weather conditions, particularly in north China, has enabled the steel plants to increase their production levels in December.

Steel-making operations among mills in north China’s Tangshan have recovered over the past week, as the country’s largest steel-producing city has reportedly lifted the intensified emission reduction measures from 30 Nov’21.

Tangshan-based mills, especially blast furnace steelmakers, have ramped up production to the upper permissible limit, according to local market insiders.

Inventory build-up at ports raises concerns

A gradual accumulation of imported iron ore stocks is being reported across all major ports in northern China.

Notably, the aggregate iron ore stock at 45 ports increased by over 2 million tonnes (mn t) on a w-o-w basis, to reach almost 155 mn t as of 3 Dec’21.

Meanwhile, traded iron ore inventory was 91.79 mn t, an increase of 657,000 t w-o-w and 52.3% y-o-y. Such high levels of inventory can easily trigger panic selling among iron ore traders

That apart, spot availability of pellets is significantly low at present. Coupled with declining coal prices and lower sintering costs, steel mills are in a proper position to take advantage of the iron ore fines prices that have been at historically low levels.

Furthermore, the newly-discovered Omicron variant of the ongoing pandemic might impact the domestic as well as the imported iron ore market in China.

Based on the above analysis, it could be expected that iron ore futures would continue to remain weak, because it is not cost-effective to produce surplus quantities of iron ore under the current circumstances.